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Conundrum of scorching summer vs. soaring inflation

Consumer Durables sector is a play on discretionary spending of households. Over FY10-20, the sector witnessed rapid growth led by improving lifestyle and the advent of consumer financing, which improved the affordability of appliances. The growth in the sector was aided by lower penetration as well as macro-drivers such as rising urbanization, electrification and middle-class households. However, in the past two years, the growth derailed due to COVID-19 led lockdowns in peak summer season, global supply-chain constraints and sharp spike in commodity costs. With weakening of COVID-19 intensity and pent-up demand of the past two years for summer products, we expect robust growth prospects for Air-conditioners and Refrigerators. However, inflation continues to remain unabated and has worsened with RussiaUkraine conflict. Taking full extent of price hike to protect margin will continue to be challenging amid high competition. We believe companies having higher scale and leaner cost structure will be able to manage the cost inflation better. We initiate coverage on the Consumer Durables sector with BLSTR and WHIRL as our top picks

Consumer Durable is a play on discretionary spending of a household

Over FY10-21, the GDP per capita has increased by 9.2% CAGR while the average selling price of key consumer durable products such as ACs, Refrigerators and Washing Machines has increased by only 4-5% CAGR. Thus, these appliances have become a lot more affordable for consumers. Household appliances are now a matter of comfort and upgraded lifestyle and no more luxury. Further, the advent of consumer financing has immensely helped to improve the affordability of appliances given the flexibility in payment terms with an option to pay EMI over a period of 6-12 months.

Consistent growth over past decade; Lockdown in peak summer derailed momentum

Aided by healthy discretionary spends, upgradation of lifestyle, consumer financing and other macro drivers, the consumer durable industry witnessed healthy and consistent growth over FY10-20. The AC/Refrigerator/Washing Machine industry grew at a CAGR of 12.9%/13.6%/11.7% over FY10-20, respectively. However, the industry declined sharply in FY21 and saw modest growth in 9MFY22 due to back-to-back lockdowns in the peak summer season on account of COVID-19 outbreak. The summer season is a critical period for the growth of appliances like AC and Refrigerator, as 50-60% of the annual demand is met during the four-month period from mid-February to mid-June.

A new ray of hope emerging with expectation of a blockbuster summer

We believe that the upcoming summer season could see a blockbuster growth due to (1) pent-up demand of past two summers (which were impacted due to lockdown), (2) waning intensity of COVID-19 as seen during Omicron wave, (3) upstocking by trade channels prior to the implementation of BEE norms from July 1, 2022, and (4) weather patterns indicating a harsh summer, which will drive demand for cooling products.

Managing cost inflation will be the key

There is a drastic increase in the prices of key inputs such as aluminium, copper, steel and plastics coupled with higher shipping and logistics cost over the past six quarters. The consumer durables industry has been unable to take requisite price hikes considering the demand slowdown and the loss of peak summer season sales. With Russia-Ukraine conflict, prices of certain commodities like aluminium as well as crude oil has escalated sharply. While we do expect the companies to pass on some extent of price hikes in the upcoming summer, we believe it will be insufficient to return back to the pre-COVID margin levels considering the continuous rise in costs and the high competitive intensity. We believe companies having higher scale and leaner cost structure will be able to manage the cost inflation better vs. peers.

Initiate coverage on sector leaders

We initiate coverage on the five prominent consumer durable players. Based on the current valuations and growth outlook over FY21-24E, we have assigned BUY ratings to BLSTR (TP: Rs1,255, 22% upside) and WHIRL (TP: Rs1,925, 18% upside) and ADD ratings to VOLT (TP: Rs1,280, 9% upside), IFBI (TP: Rs935, 11% upside) and JCHAC (TP: Rs1,935, 8% upside).

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